Share:

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

RE:Blurtman @ 2 –
wells fargo owns it. I owe 86k and I bought it for 92.7k. I am not looking to pay it off though. I will sell for 220k and pay cash for my next remodel in downtown seattle. I am tired of paying interest.

RE:wreckingbull @ 3 – Please continue to pay. According to Eric Holder, the financial system is so fragile that if you default, it can all go down. But on the upside, you can commit crime with impunity.

I don’t know that I agree with that… when mortgage rates were around 3.5% it’s possible that CD rates during the term of a 30 year mortgage could get high enough that people can earn more in a relatively safe CD (or much more if they’re willing to take on a little risk and invest in the stocks) than they end up paying in interest on the mortgage during the 30 year timeline. CD’s are paying basically nothing right now, but my guess is that in 5 or 10 years they could well be back up over 3% for a 5 year CD. Rates for 5 year CD’s were over 3.5% as recently as 2008… when 30 year mortgage rates were around 6%… so it’s not too far-fetched, IMO, to figure that CD rates could get back up over what recent mortgage rates were in the not-too-distant future. The good thing about a 30 year mortgage (with the rates where they recently were) is that you’re locked in to that rate for 30 years (and if you have the cash in most instances you can pay it off early if you decide to).

Our house cost $137,500 twenty years ago. Have refinanced a couple times, nothing extravagant, but we now still have $75,000 left about midway through a 15-year refinance and hope to pay that off with no further changes (rate is 4.75%).

RE:Azucar @ 10 -It’s early, so I may not be following you, but are you proposing that instead of borrowing to buy a home, folks should borrow to invest in a CD, when rates rise? I don’t think so. Are you proposing that folks take the 20% down and invest in CD’s and continue to rent? If their rent was less than or equal to the mortgage payment, they would be ahead financially in the short term. But when they were 60, they would still need to come up with that rent payment versus having a paid off home. And if RE appreciated, a likely long term scenario, the renter would have no equity, but presumably more savings, as money went into CD’s versus the home. Perhaps then the 60 year old could buy a home for cash. Hard to say how it could play out, I think.

RE:Blurtman @ 13 –
You are not following him. Azucar never mentioned anything about renting. He is talking about the arbitrage between the mortgage rate and some other type of investment. He mentions two. One really safe, CDs, and another more risky, stocks. 30 year fixed mortgages are not evil in and of itself. Sure, if one looks at an amortization schedule of a 30 year fixed, they may feel like they are paying way too much interest. However, they are only looking at one side of the equation.

Let’s keep it simple and say interest rates return to the historic averages. Let’s say a 5 year CD gives 5%, for example. You have a fixed mortgage at 3.5%. If you have spare funds, you can either apply extra principle to the mortgage, essentially netting you 3.5% (I am not even taken the deduction into consideration. This would reduce the rate here) or invest it in the safe CD, netting you 5%. You make 1.5% more investing in the CD.

RE:UrbanDweller @ 14 – Got it. Thanks! And as you acknowledge, the tax shield could factor into the analysis as well. Somewhat of an opportunity cost situation, I suppose. But if your mortgage is paid off, there is a 100% certainty that another mortgage payment will not be due, unless you need to go the HELOC route. And so perhaps future HELOC rates might enter into the equation as well. Right now if you have a 3.5% mortgage, for example, and have the cash to pay it off, consider that you have given yourself a HELOC at 3.5%. Can you get one at that rate now?

Well said UrbanDweller. A lot of people aren’t comfortable with debt and pay it down early which is fine.

But those extra mortgage payments can be put to better use (even in risk free investments such as CD’s). If you crunch the numbers it can make a huge difference, especially if you have a large loan and a 20 or 30 year time horizon.

I’ll give you both a real scenario of a woman who bought a condo in 1986 for about $80K. Today, it’s worth about $80K with the economic down turn.

Her stock portfolio however is worth millions, on a nurse’s salary.

Of course she paid off the condo years, and years ago, got good use out of it, but had she invested in Real Estate she would have a loss by today’s standards.

She lived in Atlanta Georgia, which is a different market from here.

Paying off the mortgage is a guaranteed return of 3.5% plus the savings in interest. You can do all the calculations you want, but if you leverage into a bigger, and bigger home, great, but once you are settled the smart money pays off the mortgage.

RE:David Losh @ 17 – RE:JWS @ 16 – RE:Blurtman @ 15 – I just want to add that paying off the mortgage quickly is not bad, assuming you have ample liquidity to cover emergencies. It depends on everyone’s risk profile. For me, I started with a 4.75% 30, refinanced to a 4.50% 30 and then finally refinanced to a 3.625% 30. I restarted the 30 year fixed amortization clock each time. I am comfortable with that. But that’s me. I am fairly young and currently investing elsewhere and have time on my side. I just wanted to elaborate on Azucar’s post #10. Leverage is not always bad if used wisely. You can increase wealth that way.

RE:David Losh @ 17 – But you forgot to include it. Can you show us an address that was worth 80K almost 30 years ago and is now worth 80K? Are there some serious deferred maintenance issues on her property? I am intrigued, so perhaps you can share the details.

One thing to consider is that a mortgage is a “forced savings account”… it may not provide the best returns, but it does force people to put away money that they would probably otherwise spend. This is why I pushed my sisters to buy a house… and why I bought my first house back in ’91!

RE:Blake @ 20 – I never understood this argument. Another example of a forced savings account is a direct deposit configuration splits between a savings and checking account. Buying a home because someone can’t keep their paws out of the cookie jar seems like an expensive proposition. Buying a home for other reasons can make sense.

If I were to buy a $500,000 house right now and if I had $500,000 in liquid assets, would I be better off taking a 30 year mortgage at 3.5% and letting (most of) my money stay in investments? At 3.5%, I don’t really think that 30 year mortgages are just for suckers.

If I have a safe investment that makes more than the mortgage rate, keeping the money in the investment washes out the cost of the mortgage. As long as the mortgage costs less than what I am making from the investments, the mortgage is a smart way to keep the cash that I have available to generate the income.

The risk comes in because of the caveat of “if I have a safe investment that makes more than the mortgage rate”. Keeping things simple, I mentioned CD’s specifically becasue generally I consider CD’s to be “safe investments”… the additional risk of stocks/other investments create a potential for greater return, but then that is the subject of a different debate that I wasn’t trying to argue.

So I mentioned CD’s… but generally CD’s don’t pay interest rates higher than the going mortgage rate. It is my belief that mortgage rates will increase from their recent low of around 3.5% significantly in the coming 10 years. I think that interest rates will be high enough 5-10 years from now that 5 year CD’s will be paying at least 3.5% soon enough that they COULD be a viable “safe investment that makes more than the 3.5% mortgage rate” during the early part of the 30 year mortgage. So it is paying the bank over $15k per year for a 500K loan, but I don’t think that it’s only for suckers.